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Dec 20, 2009
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Zale canceling orders, delaying payment

By
Reuters
Published
Dec 20, 2009

By Phil Wahba

NEW YORK, Dec 18 (Reuters) - Zale Corp (ZLC.N) said on Friday 18 December it has canceled some orders with suppliers and delayed payments, sending shares of the big U.S. jewelry store chain down sharply.

Zale
Photo: www.zales.com

The struggling jeweler, which operates the Zales Jewelers and Peoples Jewellers chains, has faced steep sales declines for more than a year and mounting debt, as well as a probe into its accounting practices.

Zale refused to accept tens of millions of dollars of inventory at the end of November, according to a Wall Street Journal report on Friday 18 December.

"We are in the process of reviewing and canceling certain orders," Zale Treasurer David Sternblitz told Reuters in an email. He declined to confirm the dollar amount for the canceled orders because Zale's review is ongoing.

"There has been some delay in payments as we determine what merchandise will be needed for the season with a significant portion of the holiday still ahead of us and what should be returned to suppliers," he said.

Sternblitz added that many of Zale's contracts with suppliers allow for the return of a percentage of merchandise.

Shares were down 32 cents, or 12.7 percent, at $2.21 in mid-day trade, but had fallen as low as $2.02 earlier.

The Wall Street Journal, which first reported the news of canceled orders, quoted Zale's Chief Financial Officer Matt Appel saying in an interview that Zale has cash on hand to pay suppliers.

"Barring something catastrophic, we will pay our bills," Appel told the paper.

SALES SLUMP

Zale's sales at stores open at least a year, a measure known as same-store sales, fell 18.6 percent in November, compared to the year-earlier period. The chain has been pressured as consumers focus their spending on essentials rather than luxury items such as jewelry.

That news, issued in early December, came less than two weeks after Chief Executive Neal Goldberg said on a conference call that the company was "cautiously optimistic" about the holiday season.

The cancellation of orders at a busy time of year is an ominous sign for Zale's sales prospects, an analyst said.

"Anyone who thinks Christmas will be dramatically up is fooling themselves," said Milton Pedraza Chief Executive of Luxury Institute. "It means they are in trouble, that they're not expecting sales to be as good as expected," he said of the cancellations.

While upscale rival Tiffany & Co (TIF.N) is in better financial health, it may not benefit much from Zale's travails, Pedraza said.

"Nobody should be celebrating that they will be taking market share from Zale, because there isn't a lot to take."

In the first fiscal quarter of 2010, which ended on Oct. 31, Zale reported a narrower-than-expected loss, its seventh in the last eight quarters, with damage from dwindling sales limited only by the shuttering of stores.

The Dallas-based chain has also liquidated inventory in the past year to combat sharply weaker sales.

The company has also had to contend with mounting debt. Its long-term debt rose 20.8 percent in the first quarter from a year earlier.

In October, Zale said it was being investigated by the U.S. Securities and Exchange Commission over accounting practices that led it to restate 2008 and 2009 earnings.

The weak market for jewelry claimed a number of victims this year. Finlay Enterprises Inc FNLYQ.OB filed for bankruptcy protection in August, while regional luxury retailer Fortunoff filed for Chapter 11 in February.

Zale's shares have fallen about 75 percent since mid-September, when they hit a year high of $8.50.

(Reporting by Phil Wahba; additional reporting by A.Ananthalakshmi in Bangalore; Editing by Hans Peters, Dave Zimmerman and Gunna Dickson)

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